My first lesson in markets

the year was 1988. I was a finance student as Canada’s equivalent of Harvard Univesity and playing varsity volleyball. My roommate (also a finance major / vball player) and I were keen poker players in the days before rounders and legalized poker rooms outside of Nevada. (We will refer to Roomie as Chip – not his real name)

Chip returned from Christmas break with a copy of Doyle Brunson’s Super System – a rare find in those days. We both studied the 7 card stud section penned by poker God David “chip” Reese. On weekends we would wander to a poker room housed in an industrial park not far from campus and put our skills to work against young single metal workers who lacked our knowledge, discipline or ability to play without drinking.

Over time Chip and I became very good players. We were both tight aggressive back when that had positive ev. Chip bluffed more than I did, but I read other players better and called more bluffs.

After playing at the local room for a couple of months we both noticed something odd. While most players, ourselves included, were expected to pay a table fee of 5 bucks every half hour, a few of the players didn’t pay the fee. As college boys we didn’t have many friends in the room, but we eventually learned the free riders were on staff professionals paid by the room. At first blush Chip and I both thought it odd, but after many discussions realized the favourable economics allowed for strategies that would be unprofitable if they had to pay the sessions fees the rest of us paid. If a normal player waits for pocket jacks or better to get involved they will slowly bleed to death due to the session fees and blinds. Without the session fees this strategy can be profitable.

More importantly, we slowly realized the house players were given the ability to pick their seats. When a spot became open the house guys always had first option to move seats. The ability to pick counter parties drove us crazy when the house guy got first shot at sitting directly to the left of some drunk leak box.

Chip and I eventually moved on to better, more ethical rooms before deciding girls were more fun. But our early poker room encounters taught us both lessons about markets even though we wouldn’t realize for many years. The notion of house preference in economics and segmentation struck us as wrong back then. Chip and I both became derivative traders, although he eventually took a more salesy / research role (god I hope he never sees that line). We recently had a beer and realized the games being played at the old poker room of 1988 are the same games being played by option and equity exchanges around the world…with the same result. Those given better economics and / or segmented counter parties act with an unnatural advantage to other players in the game…and the advantages are rarely obvious or advertised.

Interestingly most poker rooms know better than to offer assemetrical access, you would think stock exchanges would be at least as fair as the poker room at the Belagio….sadly it’s not.

Maybe I will call Chip and we will head to Vegas for better markets….not sure either of our wives would be impressed.